How much do I need to retire early in India?

A look at ‘how much’ or ‘what is the corpus required for early retirement in India?’. I had earlier written a detailed post on this subject and the common misconceptions youngsters seeking financial freedom form after reading blogs like ERE and MMM.

The central message of that post was, early retirement is possible, but one must have a comfortable corpus taking into account the high inflation levels in India. Unfortunately, many people misunderstood it and assumed that I meant early retirement is not possible. Either before or after reading this post, I strongly suggest you read that one as well: Is it possible to retire early in India?

Over the past few years, I have reviewed 5/6 portfolios of early retirees and discussed their views of risk and reward. All of them, have huge margins of safety when it comes to estimating the retirement corpus (which is an annual exercise before and after retirement. See why here)

Personally I have similar if not higher margins of safety. I am not desperate for financial independence but do seek it aggressively. With a simple MDBSC approach in mutual funds, and with copious amount of luck, I might get there before I turn 50: Retirement Planning: My Story So Far

The reason I state the above is, “margin of safety” depends on the age of the person. It is hard to convince a 25-year-old kid who has not seen the vicissitudes that assuming a 4% alpha after retirement like Mr. MMM advocates, can be suicidal or having 80% equity after retirement to compensate for a low corpus, completely ignores the importance of sequence of returns.

It is obvious that bad experience is a great teacher. Almost a decade ago, while I was waiting to be interviewed for my current job, I met my teacher and told him about my hardshipafter my father took ill. He said, “you should be happy that you are going through this when young. Will give you a lot of strength”. I was 31 then and thought it was bollocks. At 40, considering what I experienced afterward, I believe those are golden words.

My point is, while retiring early it is extremely important to account extreme situations and that comes with age and/or experience.

Let us go through an early retirement planning calculation to illustrate my point.

Consider an individual (or couple) who is(are) planning for 40 years in retirement.

Zero real return

If their current expenses are say, Rs. 3,60,000, then, for an assumed 7% yearly increase in pension (due to inflation) and for a conservative (but safe) post-tax return of 7% from the entire portfolio (zero real return), the corpus required is 1.44 Crores (40 times annual expenses at retirement)

1% real return

Same assumptions as above, but now with 8% post-tax return from entire portfolio (~ 1% real return), the corpus required is 1.20 Crores (33 times annual expenses at retirement)

2% real return

Same assumptions as above, but now with 9% post-tax return from entire portfolio (~ 2% real return), the corpus required is 1.02 Crores (28 times annual expenses at retirement)

3% real return –> 88 Lakhs (24 times annual expenses at retirement)

4% real return –> 76 Lakhs (21 times annual expenses at retirement)

What would you do if these were your numbers?

My view of early retirement is simple: I should have enough so that I don’t have to work again. I might take up part-time assignments, but I should not be dependent on this income.

I will sleep peacefully if I can retire with 1.44 Crores. If I hate my current job, I will probably retire with 1 crore (2% real return). Dangerous to assume a real return above that.

Let us see how one can pull off early retirement with 2% real return (some luck is necessary in this case though).

Suppose my retirement corpus is X. I divide the corpus into 4 parts.

X = A + B+ C+ D

A –> invested in fixed income assets (7% post-tax) and used to generate income increasing at 7% a year.

A = 10 times the annual expenses in 1st year.

B, C and D are invested in a portfolio with 60% equity (12% return) and 40% debt (7% post-tax)

B is invested for 10 years. After which it is taken out and used to generate income for years 11 to 20 in the same manner as A.

C is invested for 20 years. After which it is taken out and used to generate income for years 21 to 30 in the same manner as A.

D is invested for 30 years. After which it is taken out and used to generate income for years 31 to 40 in the same manner as A.

Note: return assumptions are invalid over a 40-year period, but since they are reasonable wrt initial years, I think it is not terrible. In any case, one can easily rework with lower returns from both equity and debt down the line.

This strategy is equivalent to an overall real return of about 2%. So if the couple has a corpus which is more than 28 times (preferably 30) current annual expenses, it is reasonably safe for them to retire.

How do you safeguard yourself against such circumstances? With age, we realize that the best way to handle this is to have a slightly larger corpus to begin with.

My take: Work with min 7-8% inflation (I work with 9%) and not more than 2% real return (I work with zero real return). Do not decide to retire unless you have a corpus that is at least 30 times your current annual expenses.

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The only conclusion I draw after reading various retirement related articles [Pattu, Subra, AIFW] is – I cannot afford retirement; there are too many unknowns beyond my control [sideways market, etc]; and “invest as much as possible, as often as you can” (since, I am dumb enough not to start in my 20s) is merely hope not a “strategy” per se.

I wouldn’t use the word ‘cannot.’ Yes, there are unknowns, and one may need some luck. But if it gives hope, I am aware of someone who is enjoying a “reasonably comfortable” retirement having entered retirement with a mere 10 times of his annual expenses. Obviously, one’s target should be for a higher multiple. But if one is willing to take some tough decisions, it is possible to retire on a lesser multiple.

The only conclusion I draw after reading various retirement related articles [Pattu, Subra, AIFW] is – I cannot afford retirement; there are too many unknowns beyond my control [sideways market, etc]; and “invest as much as possible, as often as you can” (since, I am dumb enough not to start in my 20s) is merely hope not a “strategy” per se.

I wouldn’t use the word ‘cannot.’ Yes, there are unknowns, and one may need some luck. But if it gives hope, I am aware of someone who is enjoying a “reasonably comfortable” retirement having entered retirement with a mere 10 times of his annual expenses. Obviously, one’s target should be for a higher multiple. But if one is willing to take some tough decisions, it is possible to retire on a lesser multiple.

Hi Pattu, Thanks again posting / updating this. I agree with you 0% real return and 9% inflation. (even though I used your calculators (various ones) with 8% inflation. I am still not very comfortable with 40x due the same 3 reasons that you mentioned. But even to get to this, it is a big task. Thanks to your blogs and calculators, I think that one may retire if they satisfy these , and as you rightly mentioned by luck and/or gods grace, one can hope to make it.

Hi Pattu, Thanks again posting / updating this. I agree with you 0% real return and 9% inflation. (even though I used your calculators (various ones) with 8% inflation. I am still not very comfortable with 40x due the same 3 reasons that you mentioned. But even to get to this, it is a big task. Thanks to your blogs and calculators, I think that one may retire if they satisfy these , and as you rightly mentioned by luck and/or gods grace, one can hope to make it.

Why so much obsession on early retirement? You would retire early and do what? Why not continue meaningful engagement till you can but take up interesting projects on the side too? Seems to me this entire thought on early retirement will prevent you from living a ‘normal’ life both “NOW” and “THEN”….

Why so much obsession on early retirement? You would retire early and do what? Why not continue meaningful engagement till you can but take up interesting projects on the side too? Seems to me this entire thought on early retirement will prevent you from living a ‘normal’ life both “NOW” and “THEN”….

Fantastic post. Been thinking on these lines for some time now and your views /guidance is appreciated. I also think that you can’t be conservative enough on this topic, so 40x is the minimum multiplier after sufficient padding in estimating your monthly exp. And importantly, for all those seeking early retirement it is more important to chart out detailed plans to invest your time, else you will go crazy doing nothing and sitting at home.

Fantastic post. Been thinking on these lines for some time now and your views /guidance is appreciated. I also think that you can’t be conservative enough on this topic, so 40x is the minimum multiplier after sufficient padding in estimating your monthly exp. And importantly, for all those seeking early retirement it is more important to chart out detailed plans to invest your time, else you will go crazy doing nothing and sitting at home.

Ok. i hope no one takes these numbers (28 or 30 times annual expense) as the golden rule and retire. Reasons: 1 – You may not have the same financial skill as the person that Pattu has in mind. Even if you are a genius now, after 10-12 years of retired life, I am not sure how good that skill will remain. 2 – 40 years of retired life is toooo long. many unexpcted things will happen. If you do not have extra income (salary!), you will not be able to recover. 3 – If the mareket crashes by 50% (as it did in 2001 and then in 2008), then you will be withdrawing from the lower corpus you have. Later even if the market recovers, you would have withdrawn more money for the coprus to recover fully. (Read Jim otar’s blog to understand this – http://www.retirementoptimizer.com. Read old literature in “Articles” link in it). 4 – In Pattu’s calculators, 40 years can be seen in one screen and you think you have complete control on it. But life is too long and complicated to predict anything. Look back and see how many unexpected good and bad things have happened in last 20 years. And did these 200 years went as you planned 20 years back???

Ok. i hope no one takes these numbers (28 or 30 times annual expense) as the golden rule and retire. Reasons: 1 – You may not have the same financial skill as the person that Pattu has in mind. Even if you are a genius now, after 10-12 years of retired life, I am not sure how good that skill will remain. 2 – 40 years of retired life is toooo long. many unexpcted things will happen. If you do not have extra income (salary!), you will not be able to recover. 3 – If the mareket crashes by 50% (as it did in 2001 and then in 2008), then you will be withdrawing from the lower corpus you have. Later even if the market recovers, you would have withdrawn more money for the coprus to recover fully. (Read Jim otar’s blog to understand this – http://www.retirementoptimizer.com. Read old literature in “Articles” link in it). 4 – In Pattu’s calculators, 40 years can be seen in one screen and you think you have complete control on it. But life is too long and complicated to predict anything. Look back and see how many unexpected good and bad things have happened in last 20 years. And did these 200 years went as you planned 20 years back???

but i am a little unclear at the first premise of 40 times annual exps. of rs. 3.6 lakhs now. when i look at the corpus, appx annual income of rs. 10 lakhs is produced by this corpus. assuming a 7% compounding, this will become the exps norm after about 15 years, implying an age of 50. Is that what you intended ? would be thankful for clarifications…

but i am a little unclear at the first premise of 40 times annual exps. of rs. 3.6 lakhs now. when i look at the corpus, appx annual income of rs. 10 lakhs is produced by this corpus. assuming a 7% compounding, this will become the exps norm after about 15 years, implying an age of 50. Is that what you intended ? would be thankful for clarifications…